Now that the level 2 draft delegated acts are being circulated (on a somewhat restricted basis), insurers can now begin to evaluate what will need to be done in the run in period. Many have waited to see what was in the level 2 draft text with regards to look-through.
The text states that look-through should be applied to investment funds, but that is where look-through cannot be attained, the mandate of the fund can be used, once it is strictly followed, for up to 20% of an insurers investments. This is an interesting statement, as if one is to ensure a mandate is strictly followed, you will need to get security by security level data on a periodic basis. Furthermore, if you are a life company the level of investment in funds will be closer to 80% rather than 20%. The mandate of the fund only exists in the prospectus, which would mean implementing a manual process of extracting this data to feed models. In all it just doesn’t add up.
Look-through data for Solvency II is not as straight forward as many asset managers would like to believe. It is a two pronged approach; complete look-through is made up of internal and external look-through. Although some asset managers believe that providing one will be sufficient. This is not the case, both are required.
Internal look-through is not viewed as a problem for asset managers, it may take a bit of time and work to complete it but the data is accessible to them so they can check internal look-though off their checklist fairly quickly. Simply put, it is categorised as portfolio reporting or internal fund-of-fund structures. I’ll return to this later in the blog.
External look-though and attaining data from their peer asset managers, is a slightly different beast. This opens up a whole new world of logistical issues and concerns for many asset managers. Where asset managers have invested in other managers funds through fund-of -funds the data is not attainable.
The issue is accessibility of data. The data required for external look-through is not at hand for them, they will have to go requesting it from other asset managers. Competing asset managers will not be comfortable providing this data to each other in the required timeframes.
Let’s return to the internal look-through side of things. Asset manager’s perception is that they can do this, with a level of work applied. But consider this for a moment. If an asset manager has a peer investing in their equity or bond fund, or internal fund-of-fund, they again will not share this data.
It’s a return to external look-through, but instead of being at the top of the look-through tree, they are at the bottom of the tree. Now they are the ones being required to share data with their peers, which again is not something that is going to happen.
This is a complex matrix of investment and needs to be viewed from all perspectives. Remember, insurers don’t have internal or external look-through. They just have look-through, and it would be worth asset managers remembering this.
Filed under: insurance regulation, look-through, regulation, Solvency II Tagged: asset managers, External Look-Through, Insurers, Internal look-through, Level 2 draft delegate act, Solvency II Image may be NSFW.
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